For Investors with a Taste for Adventure

For Investors with a Taste for Adventure 

Emerging Markets Versus U.S. Markets

Two Important Upcoming Events

As Chief Analyst for Cabot Emerging Markets Investor, I hang out at the other end of the pool from my U.S.-centered colleagues. While they’re recommending companies that everyone’s familiar with (Apple, Amazon, Facebook, Tesla), I’m raving about Mexican airlines or Indian car companies or Chinese travel agencies.

It can be a hard sell, of course, because there’s a natural tendency to prefer what you know. But for investors with a little taste for adventure, emerging markets are more fun than an unlimited ticket to a go-cart track (and offer much bigger potential rewards).

Yes, when markets turn sour, emerging market stocks can take some skin off. But that only happens if you’re sitting like a bump on a log and watching your holdings tank.

If you have loss limits for your stocks and explicit market timing rules about when to go to cash in your portfolio, you can sidestep the bears and wait for the bulls to return with a tranquil spirit. (The portfolio of Cabot Emerging Markets Investor, which is my baby, is now 60% in cash, and will continue to lower its exposure if markets remain threatening.)
In 2015, for instance, before markets got cranky, Cabot Emerging Markets Investor gathered a 57% profit in Vipshop Holdings (VIPS), 26% in India’s HDFC Bank (HDB) and 23% in Chinese game giant NetEase (NTES).

Personally, I think that for every careful, methodical buy-and-hold, value-and-income investor out there, there’s another one who wants a shot at the home-run stock, and is willing to take the risk to get it. It’s how I run my own portfolio, and I wouldn’t have it any other way.

But I also like to know exactly the kind of risks I’m dealing with, so when the end of the year rolls around, I like to do a reality check to see how international and emerging markets performed versus U.S. markets.

A taste for action, but a desire for a realistic assessment of risk. That’s me.

A quick note on methodology: When I look at market results for a year, I look purely at price appreciation in dollar terms. I know that anyone who owns U.S. stocks like Apple has to pay attention to currency exchange rates, which can have a big impact on the bottom line. Fortunately, Cabot Emerging Markets Investor sticks entirely to American Depositary Receipts (ADRs) that trade on U.S. exchanges, so I don’t have to worry about currency fluctuations. I use the standard (large- and mid-cap) MSCI results for the calendar year. (MSCI used to be Morgan Stanley Capital International, but now it’s an industry standard known by just its initials.)

Emerging Markets Versus U.S. Markets

Here are some headlines.

Of the 23 countries in the MSCI developed markets, Canada had the worst 2015 (down 25.8%), followed by Singapore (off 20.8%). Denmark enjoyed the strongest returns (22.3%), beating out second-place Ireland (+15.1%) by a tidy margin. 16 of the 23 countries MSCI followed finished the year with a net loss, including the USA (down just a fraction at –0.8%), Germany (off 3.7%) and the U.K. (down 11.0%).

There are probably plenty of nuggets of wisdom hidden in the MSCI numbers, just waiting for a data miner to drill down to get them. But when Denmark is the leader and Canada brings up the rear, I don’t think the effort is worth it. I’ll just note that Australia (–14.1%) and New Zealand (–10.6%) are heavily dependent on exports of raw materials to China, which explains their weakness.

Results on the emerging markets side are a richer trove for me, helping to explain why it was so difficult to find winners in developing world stocks in 2015. MSCI lists 22 countries in its MSCI Emerging Markets Index, and last year 21 of them finished the year in the red.

The biggest loser isn’t much of a surprise: Greece lost a whopping 62.1% in 2015, far outdistancing Colombia and Brazil, which fell over 43% apiece.

For much of 2015, Greece was a perpetual stone in the shoe of equity investors everywhere in the world. But the fortunes of Greece aren’t really all that important to global investors. Instead, analysts and investors were terrified about what might happen if Greece defaulted and hit European countries with large positions in Greek sovereign debt. The eurozone would have had a heck of a time handling all that debt, a phenomenon familiar to anyone who remembers the crap-storm caused by defaults on heavily leveraged U.S. mortgage-backed securities back in 2008.

This table raises lots of questions for me, first among them how it is that Hungary managed to escape the drag that pushed every other emerging market lower, and did it by such a huge margin?! (It’s unfortunate that Hungary doesn’t have a single stock that trades on U.S. exchanges. That would be fascinating.)

The other data point that seems about right for emerging markets is that their results varied much more than those of developed markets. Emerging markets are always more volatile than developed ones, which presents more risk but also greater potential rewards.

There aren’t any predictions hidden in these numbers either. If every calendar year that produced big losses were always followed by a year of big gains, investing would be easy! But it’s not.

But having a trusted guide to tell you when it’s safe to start swimming in emerging market waters again could make a huge difference in your growth portfolio this year. Cabot Emerging Markets Investor does exactly that, plus identifying the leaders in these dynamic markets. A subscription now will position you at the head of the line when we get the emerging-markets green light. Click here to get started.

My stock pick this week is a Chinese biotech company. The company is called China Biologic (CBPO), and I think it’s a good example of the kind of stock story you can still find in China and the other emerging markets.

This analysis on the stock is from a January issue of Cabot Top Ten Trader, a weekly advisory that identifies and analyzes the 10 strongest stocks of the previous week.

As you read, you’ll note that the Technical Analysis ends with the admonition, “A dip below 125 would be bearish.” And if you look at a daily chart of CBPO, you’ll see that the stock took a quick dive in early January and has been flopping around between 115 and 130 for a few weeks.

It’s still a stock I like, and I have it on my watch list. When it gets going again, it will have huge potential.

Why the Strength

China Biologic Products’ business is based on medical products made from plasma, which it collects in 12 donations centers. China Biologic processes the plasma into albumin, immunoglobulin and clotting factor products. Albumin is used to treat shock caused by blood loss or burns; immunoglobulin can prevent measles and hepatitis, treat rabies and aid in recovery from surgery. Clotting factors are used to treat both congenital and acquired clotting disorders. There is a much wider range of products and conditions, but that’s the core of the business. This base has been strong enough to power China Biologic to eight years of double-digit revenue growth and 11 quarters of positive earnings growth. After-tax profit margins have also topped 30% for the three most-recent quarters. The company has built a niche business using a vertically integrated model—it controls raw material collection, processing, production, marketing and distribution—in a growing market. There is no mass market to address, but the prospects for steady growth are excellent. Earnings for Q4 and 2015 will likely come out in early February.

Technical Analysis

CBPO has made a good recovery from its August–September correction from 128 to 81. The stock rebounded to 127 in November, then consolidated for a few weeks before powering out to new highs in mid-December. After reaching 142 last week, CBPO was down at today’s open because of the general weakness in Chinese stocks, but remains well above its rising 25-day moving average, now around 128. CBPO looks like a good buy anywhere under 140. A dip below 125 would be bearish.

To get more information about Cabot Top Ten Trader, click here.

Two Important Upcoming Events

Lastly, I’d like to write about a couple of upcoming events that present unique opportunities for you to increase your market knowledge and improve your investing success.

The first event is my upcoming Lunch with the Analyst, the fifth in our series of free webinars that offer market insight, investors education and a chance to ask questions of a real stock analyst, who happens to be me this month.

February’s edition of Lunch with the Analyst will kick off at 1:00 pm Eastern Time on February 17 and will feature an hour of the best advice I can give on how to recognize a bottom in the stock market and how to react when you see one.

I will also offer the traditional take on how stock markets are behaving and how you ought to be trimming your sails accordingly.

And I will spend the last 20 minutes or so answering as many questions from webinar attendees as I can get to.

Lunch with the Analyst is one of the best illustrations I know of how Cabot manages to make equity-investing advice interesting and understandable. Cabot’s analysts use the insights from nearly 45 years of hands-on market experience to improve your stock picking, portfolio management and market analysis.

The second event is a far more intense and compelling encounter.

The Cabot Investors Conference (the fourth edition) brings investors from all over the U.S. to scenic Salem, Massachusetts every August. This year’s dates are August 10 through 12. It brings all of Cabot’s analysts to Salem and gives attendees a chance to learn from the masters.

We never know what the stock markets will be doing when the conference is on, but we will feature very timely stock picks and buy/sell/hold advice along with programs on lasting market wisdom and how to build your portfolio.

The programs will offer insights for growth investors and those who prefer the value style, income investors, small-cap speculators and options traders. And we will field questions from attendees and stage panels where analysts debate their styles and top picks.

All in all, it’s a great experience for everyone, from the newest investors on the block to those who have decades of experience (and the scars and war stories to show for it).
I hope you’ll consider attending both the free Lunch with the Analyst webinar on February 17 at 1:00 pm (click here to register) and the fourth annual Cabot Investors Conference on August 10–12 here in Salem (click here to register). 

We’re all in this together.

Paul Goodwin,

Chief Analyst, Cabot Emerging Markets Report 


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